How Long Did the Housing Bubble Go On For?

Brad DeLong posts this on his blog: 

Over the four-year period 2003-2006, annual construction spending rose to a level $150 billion above and then fell back to its long-run trend. Thus by the start of 2007 United States was overbuilt: about $300 billion had been spent building buildings in excess of the long-run trend.

When this construction was undertaken these buildings were expected to more than pay their way. But the profitability of these buildings depended on two shaky foundations: a permanent fall in long-term risky real interest rates, and permanent optimism about real estate as an asset class. Both these foundations collapsed.

By 2007, therefore, it would have been reasonable to expect that construction spending in United States would be depressed for some time to come. Since construction spending had run a cumulative amount of $300 billion ahead of trend, it would have to run $300 billion behind trend over a number of years in order to get back into balance. So everybody in 2007 was expecting a slowdown to be led by construction. But we were expecting a minor one: a fall in construction spending below trend of $150 billion a year for two years or $100 billion a year for three years or $75 billion a year for four years.

And starting in 2007 construction spending did indeed fall below trend. But we were expecting a minor one: a fall in construction spending below trend of $150 billion a year for two years or $100 billion a year for three years or $75 billion a year for four years. Instead, it fell $300 billion a year below trend. And it has so far stayed down for four years. And there is no prospect of rapid return to anything like normal levels.

Therefore when this construction cycle will have run its course, the United States will have first have spent an excess $300 billion, and then fallen short of trend by a cumulative $2 trillion of construction spending not undertaken. The net effect will be an at least $1.7 trillion construction shortfall in the United States: $1.7 trillion of houses, apartment buildings, offices, and stores not built.

He's basically describing this graph:

I don't know if I necessarily disagree with Professor DeLong, but I am curious about his trendline decision.  He justifies it here:

Now let me briefly turn to construction. We expected a construction slump after the mid-2000s boom. Take construction spending in the United States as it stood back in 2001--when nobody thought we were overbuilding or overbuilt--and project it forward at the 3% growth rate of the American economy. We should probably project the construction trend at a slightly higher rate than that, because as people grow richer they do want to spend a greater share of their larger incomes on housing in a way that they don't for, say, food.

I'm not totally convinced by this.  Post financial crisis "nobody thought" isn't very solid ground.  So I looked at the longer annual real residential investment series:

 I see basically three separate periods here.  69-81 looks like 2 business cycle driven very volatile periods with a little growth.  After the 82 trough the expansion seems sustained a little longer and the fall off doesn't seem so steep.  The red portion, which somewhat arbitrarily begins in 1992 is the beginning of an virtually uninterrupted climb in residential housing (even during the 2001 recession) that eventually became what everybody agrees was the housing bubble of the mid-2000s in which residential investment stays above the trend of the previous years until the collapse in 2006/7.


That chart reminds me of this chart:

Bubble run ups usually have a long period of above trend growth before you hit the "mania phase".  In the case of housing, that's still above trend investment and is part of the overbuilding that still needs to be "corrected".  


I think the case that the bubble had been a long time coming can be made.  For instance, if we take 2003-2006 as the mania phase then it makes sense that this is the period where subprime mortgages arise.  There are two stories people tell about subprime.  The first is "chasing yield" story.  That is, banks were lending to risky borrowers they said were safe but still paid high interest rates.  The other story is that subprime was the last place to go because all the good borrowers had already taken out mortgages and refinanced etc.  To the extent that the second story is true, how long did it take to make it all the way through the credit worthy borrowers?  Did mortgage lenders become instantaneously aggressive in 2003 or was there a slow push of the supply curve of mortgages out further and further?


This brings me to the next argument in favor of my new pet theory.  I'm a big subscriber to the "giant pool of money" theory of the housing bubble.  However, I tend to date the capital inflow bonanza from the Asian Crisis of 1997. In the late 90s there was a sudden shift from capital flow "excess" into government deficits to "private deficits" (Private Savings - Investment < 0).  Meanwhile, the current account balance continued it's historic decline.  The dot com bubble, of course, is what everyone thought about and thinks about but a stock market bubble is not mutually exclusive with a housing bubble's infancy.


So whats the point?  Well, I want to go back to Professor DeLong's idea that housing was only over built by $300billion and that we are "missing" $1.7trillion in residential investment that will eventually come roaring back.  The increase in prices above the my trendline if measured from 1992 adds another $1.4trillion dollars to the overbuilding total.  So if we think of the housing bubble as a generational phenomenon and not just a couple of years we had over $1.7 trillion in excess housing being built.  The "correction" so far according to the 67-92 tread line is also much shallower, only about $425 billion.  Suggesting we still have a long way to go before we come out even on residential housing.

NY State Property Tax Cap Deal.

A property tax cap deal has apparently been made.  From the NY Times:

 The agreement, which would take effect next year, would limit the annual increase in the overall amount of property taxes collected by a local government or a school district. Property tax increases for individual homeowners could vary as properties are reassessed. 

“This issue is probably the most powerful and pervasive issue across this state,” the governor said at an appearance with legislative leaders on Tuesday. “People in New York City don’t feel it, but I can’t tell you how many times somebody has come up to me and said, ‘You have to do something about property taxes; I just can’t afford to stay in my home anymore.’ ”
 ...

Forty-three other states have some limits on property taxes. But New York is unusual because property taxes are the main source of support for schools outside of New York City. In the city, the schools are primarily financed by a municipal income tax.

At a talk I went to with The Fiscal Policy Institute's Frank Mauro he pointed out that the property tax cap is attractive politically because the Governor can be seen as taking on the issue of property tax relief without actually doing anything (i.e. spending money).  Here is an except from Mauro's testimony before the state Assembly:

Despite the “tax reform” roots of the current property tax debate, tax reform options are currently receiving insufficient attention as many of the state’s business elites promote the inherently flawed idea of a “one size fits all” cap that by its very nature implies that the current distribution of resources among the state’s school districts is just fine and that they should all move in lockstep from where they are now.

But the tax cap solution is even worse than that since the proposed caps do not include any
requirement that the state uphold its end of the bargain for financing a reasonable portion of the
costs of education or of basic municipal services. And the 2005 cap on the counties’ Medicaid
costs misses the major mismatch – that some counties have much greater than average numbers
of needy families relative to their property tax bases. Taxable property values are not by some
magic distributed among school districts in the same proportions as students or student needs;
nor are taxable property values distributed among cities, towns and villages in the same
proportions as are their responsibilities for providing basic municipal services.

This means that without sufficient state aid distributed on a basis that takes service
responsibilities and ability to pay into consideration, the pressure on the property tax is going to
be much greater, on average, in some communities than in others. The reason that I say “on
average” is that even if New York State were to deal effectively with the fiscal disparities that
exist among its local governments (and it certainly should do so), there will still be hundreds of
thousands of households who, through no fault of their own, are facing property tax bills that
represent inordinate portions of their incomes. This includes, for example, workers who have lost their jobs as well as long time residents whose homes have increased in value much more than their incomes. For these households, the only affordable and effective solution is a circuit
breaker that targets relief to those who are most overburdened by property taxes.

The 2007 statewide solution to the Campaign for Fiscal Equity litigation provides an example of
an effective strategy for addressing fiscal disparities among local jurisdictions but it also
demonstrates why an individually targeted circuit breaker is an essential element of an effective
overall strategy. The plan that the Governor and the Legislature agreed on in 2007 was based on
two essential premises: First, that all children in the state are entitled to a sound basic education
whether they live in a school district with $150,000 of taxable full value per pupil or in a school
district with $1.6 million of taxable full value per pupil. And second, that the tax effort that can
be expected from low income New Yorkers is much less than the effort that can be expected
from high income New Yorkers. We need a school finance system that is fair to the state’s tax
paying households and that is fair to the state’s school pupils. The 2007 school finance reform
plan recognizes that some communities can contribute much more on average to the cost of a
sound basic education than can others but even among communities with very high incomes on
average (and among communities with appropriately low full value tax rates) there are
households whose property tax bills represent unacceptably large percentages of their income.
These are the people who are being forced out of their homes by property taxes; and the only
affordable and effective way to assist them is through a targeted circuit breaker. A “one size fits
all” cap on the growth of school district tax levies will not address their situation but it will have
very negative consequences for the concomitant need to reduce fiscal disparities among school
districts while ensuring that all the state’s school children have access to a sound basic
education.

The property tax problem has been caused because local taxes are as far downhill as taxes can flow.  Federal and state tax and spending cuts have meant the burden has been shifted to localities.  In New York state in particular this has lead to a deep division in the quality of education across the state.  Rich municipalities have good schools because they can afford them and poor school districts do what they can.  Of course, a Mauro suggests a 2% property tax cap is going to put even the better schools in jeopardy.  Compoundingly

Brad DeLong points us to Dan Kuehn who points us to DARPA

Brad DeLong:

Dan Kuehn points us to DARPA:

Facts & other stubborn things: The Defense Advanced Research Projects Agency (DARPA) has initiated a study to inspire the first steps in the next era of space exploration—a journey between the stars. Neither the vagaries of the modern fiscal cycle, nor net-present-value calculations over reasonably foreseeable futures, have lent themselves to the kinds of century-long patronage and persistence needed to definitively transform mankind into a space-faring species.... We are seeking ideas for an organization, business model and approach appropriate for a self-sustaining investment vehicle. The respondent must focus on flexible yet robust mechanisms by which an endowment can be created and sustained, wholly devoid of government subsidy or control, and by which worthwhile undertakings—in the sciences, engineering, humanities, or the arts—may be awarded in pursuit of the vision of interstellar flight...

I kinda think this problem has already been solved: all you need to do is draw the corporate charter to insulate the corporation's decisions from speculative short-termism, and you are there.

I disagree with  Prof. DeLong, I dont think it can be solved (Kuehn seems to agree with me).  Here is Keynes (General Theory; Ch12) on why the problem is deeper than corporate structure:

 Investment based on genuine long-term expectation is so difficult to-day as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun.

It is particularly heart breaking--though not unsurprising--that this is the direction DARPA is so explicitly moving in.  It was the public/private/academic long term goal oriented partnerships fostered by DARPA that... well... gave us virtually everything that has made this blog possible (except the transistor,which was developed by another unique mid-20th century institution).

I have an underdeveloped theory about this.  My argument essentially runs that there is a class of "public goods"  that the market either cannot deliver as efficiently as possible or even at all because they are "outcome" (or quantity) goods and not "price" goods.  That is, they are things that are goals that have to be met irrespective of price or rather that their social benefits outweigh their private benefits (ala Keynes).

The development of the computer was only made possible because both the Census Bureau and the military were "outcome" oriented organizations (with relatively deep pockets) that were willing to finance failures.  Had were relied on the "price" (rate of return) mechanism in a world of uncertainty it seems highly unlikely that any one private firm would have thought it worth it's while.  In fact, the poster child of the mid-century computer IBM essentially only picked up the computer in any real way after it had been proven profitable and IBM's success with the computer had  more to do with the way it the marketed and combined the various aspect of the computer than anything else.

I also think medical care and higher education fall into this class of "outcome" goods, but their problems are demand side problems and not supply side problems like the one DARPA seems no longer willing to help solve.

Mike Konzcal again and something else that came up in class.

Here is the whole post. Its a story about HUD (Housing and Urban Development) being one of the few federal government organs who actually give a shit about the law.  it may be not that interesting but I just want to highlight one paragraph:

In this dark, cynical period, I’m actually shocked how refreshing I find this. Here’s a simple request: when it comes to making sure the financial sector isn’t running out of control over trust and mortgage law and making a mockery of the foreclosure process (and destroying the economy in the process), can we get less Ivy League supermeritocrats and more people associated with the “International Association of Chiefs of Police” and the “Bureau of Engraving and Printing”?

I wasted another opportunity in class on Tuesday (the other one is here).  I didn't want to waste a lot of time pontificating becuase thats not what you guys care about right now, but for a moment we talked about what you have to do to get a job at Goldman Sachs and I said the answer was simple: Graduate with a 4.0 GPA at Harvard.


There is something deeply wrong with this system, though.  These "supermeritocrats" as Mike puts it do essentially control the country, but they do it for their own benefit.  A friend of mine who works in the city's budget office has a slightly different take on the supermeritocrats.  He works with a lot of Ivy League types and his biggest complaint is something I've found both disturbing and oddly gratifying.  To quote: "They aren't exactly independent thinkers."

Talking Points Alert: Mike Konczal/David Min and the "Zombie Idea" that Fannie and Freddie caused the housing crisis.

This is a great summary from Mike Konczal at Rortybomb of the faulty reasoning used to claim F&F were responsible for the housing crisis.  


I was asked to be more balanced in class, but instead I'm going to post a really good take down of one of the "other sides" golden calves.  I'll also sort of missed an opportunity to expand on my philosophy about this.  I know some of you in class disagree with me and that is 100% fine.  However, I do not view it as my job to be impartial or objective, I view it as my job to be honest.  I have been upfront about which way my views slant and that the extent to what I feel like I should do.  I feel we live in a world where acting like you are "objective" is just a dishonest rhetorical device and that most of the reason you will be graduating into a miserable job market is because a whole bunch of people "objectively" said housing prices can increase forever.


Anyway, here's Mike...

But first, as always, Wallison brings out the same argument that blames the crisis on Fannie and Freddie that he’s been using since 2009.  Introduction (my bold):

[G]overnment housing policies…fostered the creation of an unprecedented number of subprime and otherwise risky loans immediately before the financial crisis began….In March 2010, Edward Pinto, a resident fellow (and my colleague) at the American Enterprise Institute who had served as chief credit officer at Fannie Mae, sent the Commission a 70-page, fully sourced memorandum on the number of subprime and other high-risk mortgages in the financial system in 2008. Pinto’s research showed that he had found more than 25 million such mortgages (his later work showed that there were approximately 27 million). Since there are about 55 million mortgages in the U.S., Pinto’s research indicated that, as the financial crisis began, half of all U.S. mortgages were of inferior quality and liable to default when housing prices were no longer rising.
 This usually leads to the conservative talking point: half of all subprime and other high-risk mortgages were held by the GSEs!  But wait, what’s that “and other high-risk mortgages” doing there?

This zombie argument finally got fully dismembered by Center for American Progress’ David Min in his recent report taking apart Wallison’s FCIC dissent, Faulty Conclusions Based on Shoddy Foundations.

Wallison and Pinto claim that the GSEs were responsible for half of all subprime and subprime-like mortgages. They do this by making up a confusing definition of “subprime-like,” what above is mentioned as their “and other high-risk” mortgages.

The fun part of making up your own definition is that it can be whatever you want it to be. If we define a conventional loan made to a borrower with a FICO credit score between 620 and 660 as a “leprechaun” and a loan with a cash down payment of less than 10 percent as a “unicorn,” we can say that Fannie and Freddie was responsible for half of all leprechauns and unicorns under oath and while serving on the FCIC.

Now instead of a leprechaun they’ve created the definition of “subprime by characteristic” and instead of a unicorn they say “Alt-A by characteristic,” for the numbers mentioned above. This is a definition nobody in the financial markets use.

The three-card monte trick is pretty straightforward once you know where to watch. There’s a lot of statements that go: “Fannie and Freddie made a lot of subprime loans and other high-risk mortgages. And subprime loans had a 25% default rate!” And you naturally assume that the other high-risk loans must also have a gigantic default rate compared to regular mortgages. Except they don’t. From Min’s paper (p. 8):

That 8.45% and 10% are the “other high-risk loans” that they try and shoe-horn in with subprime.  That’s a high default rate, but it’s nowhere near as scary as the nearly 7% default rate on regular mortgage loans.  And this trick is even more apparent when you break it down by securitization (see below).  These so-called high-risk loans are much closer to regular loans when it comes to defaults, which are high across the board given the housing bubble and subsequent recession and high unemployment.

Min’s document goes through the rest of their claims related to the CRA and securitization as well.

Wage Growth Targeting.

Mike Konczal at Rortybomb talks about a Makiw and Reis paper that came to his attention through a post made by Matt Rognile at mattrognile.com. I've been thinking a lot about inflation recently becuase I've been reading about the late 60s/70 recently and there was a flare up over inflation targeting in the blogosphere after Bernanke's press conference.  Matt posts a lot about inflation that I disagree with, but it's definitely to his credit that disagreeing with him means whipping out google scholar.


Anyway, the thing from the paper Mike picks up:

Mankiw writes about his ideal target using that criterion and brought up an interesting historical story:

Our results suggest that a central bank that wants to achieve maximum stability of economic activity should give substantial weight to the growth in nominal wages when monitoring inflation…

 An example of this phenomenon occurred in the United States during the second half of the 1990s. Here are the U.S. inflation rates as measured by the consumer price index and an index of compensation per hour:
1995 2.8 2.1
1996 2.9 3.1
1997 2.3 3.0
1998 1.5 5.4
1999 2.2 4.4
2000 3.3 6.3
2001 2.8 5.8

Consider how a monetary policymaker in 1998 would have reacted to these data. Under conventional inflation targeting, inflation would have seemed very much in control, as the CPI inflation rate of 1.5 percent was the lowest in many years. By contrast, a policymaker trying to target a stability price index would have observed accelerating wage inflation. He would have reacted by slowing money growth and raising interest rates (a policy move that in fact occurred two years later). Would such attention to a stability price index have restrained the exuberance of the 1990s boom and avoided the recession that began the next decade? There is no way to know for sure, but the hypothesis is intriguing.

It’s things like this that make me worried about being creative with inflation targeting. No notable inflation in the economy and the only period of sustained wage growth in my lifetime – better get the central bank to choke that off immediately.  Can some Republican officially propose “price stability and minimal wage growth” as the new dual mandate for the Fed?

First Mike already kind of makes this point but in the Mankiw and Ries paper they say that the central bank in their model targets inflation, so it's sort of confused to then present the example above as a way in which their model suggests central banks can smooth output.  Second, the evidence is mixed at best (here is a short paper by Hess and Schwietzer at the Chicago Fed) that wage increase cause price increase and not the other way around.  So, while the theory may point to wage targeting does it even make a difference in practice?  .


For me, it comes down to the idea of who enjoys the fruits of productivity gains in the real world.  It is conventional wisdom (that may be wrong!) that wages have not been keeping up with productivity gains over the last 30 or 40 years.  In fact, the late 90s were one of the few periods where there was a chance for labor to "catch up" because unemployment was so low.  Price inflation targeting--while not my favorite way to do monetary policy--at least forces (ideally) both capital and labor to "share the pain" with wage growth it seems to be you would just be capping wages without capping profits.


I mean, it seems like the market has been doing this anyway but it's not quite clear what you get from enshrining that as policy.

The Final Exam Scheduling Problem.

Queens College has scheduled several finals on the same day and time. I have to come to Queens n both May 19th and May 24th. Both days I have exams scheduled from 8:30 to 10:30. I will allow students to take their exam on either day if they have a legitimate scheduling conflict.

If you need to switch, you must EMAIL ME BY MAY 17th. You must include in the subject line which class of mine you are in. You must also provide in the body of the email your name and the following information about the class that is conflicting with mine: class name (i.e. Economics 101: Macroeconomics), time, and instructor of the class.

Students not following the above instructions will not be allowed to take the exam on the "wrong" day.

Inflation in the 70s links.

I'm prepping for a 20th Century US history class and I came across these links that ill need sooner or later:

http://delong.typepad.com/sdj/2008/09/note-to-self-in.html

http://delong.typepad.com/sdj/2007/04/what_caused_the.html

Isn't Ben Bernanke what the New Keynesians want?

Paul Krugman made me think of one thing that has always bothered me about New Keynesian economics when he said that Bernanke is being intimidated by inflation hawks the other day. The idea of the conservative central banker.

I have never really liked the claim that you need an overly conservative central banker to maximize social welfare because your normal run of the mill central banker will over inflate. This always bothered me. There always seemed to me to be a fair amount of intellectual path dependence to that finding in the 1999 "Science of Monetary Policy" paper. I'm just not sure how you come to that conclusion without looking for it. Like, it seemed to me the New Keynesians were looking to prove the ad hoc finding that you need a central banker who's DNA tells him to keep inflation low.

Speculation on the history of economic thought aside, I never really understood that proposition in a general equilibrium model. I mean, I know the math works, but I can't help but feel like in a perfectly rational world of perfectly rational agents the perfectly rational central banker will figure out the optimal way to manage inflation. For instance, Ben Bernanke has probably seen and can probably solve the equation that tells him to be overly conservative and he can act on it, whether or not he was beaten with the inflation stick when he was a boy.

Of course, that's the problem. There is a clear penalty for not being conservative but no clear penalty for being too conservative. That's a serious asymmetry and I don't think Ben Bernanke is being forced to do anything, listening to the hawks is welfare maximizing.

A Brief History of the Fed and the Financial Crisis Part II: QE I and II

Here is Part I.

This post I'm going to talk about Quantitative Easing, which the Fed pursued with two different programs over the course of the last 2 1/2 years.

Quantitative Easing 1 (QEI):

Here are two other useful timelines that were written when the second round of quantitative easing (QEII) was expected:

Calculated Risk: A QE1 Timeline
WeeklyBasis: Quantitative Easing 101

Now, the model we use in class of the fed funds market predicts that once the Fed is on the flat part of the reserve demand curve (i.e. at the rate where the Fed pays interest on reserves) there is nothing left for the fed to do vis-1a-vis interest rates. If the Fed did not pay interest on reserves then the "floor" on the Fed funds rate would be at 0% because no bank will loan money at a rate lower than zero ( a negative interest rate) because then you are paying someone to borrow from you. In either case this is know as the "liquidity trap". By December of 2008 the Fed was fully "caught" in the liquidity trap.

The Fed however was not necessarily out of bullets. I'm going to repeat figure 1 from part 1:

Figure 1 (from part 1)

Again, you will notice that the fed funds rate has a very direct effect on short term rates but less of an obvious or direct effect on longer rates. Since there was clearly a problem brewing in the mortgage/housing industry the Fed set about trying to solve the problem directly. In November of 2008 the Fed announced that it would buy $600 billion in "agency backed" (top of the line?) mortgages starting in January of 2009. As the WeekBasis post above points out, before the fed bought any mortgages mortgages rates dropped by 1% in anticipation of the purchase.

Figure 2

Figure 2 shows the interest on prime mortgages. There is a very clear decline in the interest rates of mortgages. There was also a very clear decline in AAA corporate bonds and 10 year treasury bonds which are close subsitutes for mortgages (important for QEII).

It's important to understand what is going on here. The Fed is simply preforming open market purchases--which means increasing the money supply--but instead of buyin short term treasury bonds the fed is simply buying longer terms private instruments. That is to say, there is (literally) no law that says that the Fed's only focus should be on the single fed funds interest rate. Since the fed funds rate had essentially become useless as an instrument of monetary policy the Fed went directly to the source of the problem and changed mortgages rates directly. It bought down mortgages rates in an attempt to make it cheaper and easier for people to buy and/or (probably more importantly) refinance their homes.

In March the Fed announced the would purchase a total of $1.2 trillion in "agency backed" (guaranteed by Fannie and Freddie) mortgages.

QEII

The Fed had finished its mortgages purchases by March 2010. In late August Bernanke started talking about a second round of quantitative easing. In early November the Fed officially announced that it would purchase another $600 billion ($75 a month) in securities. However, QEII is slightly different that QEI. While QEI was a direct purchase of mortgages QEII is a program to purchase 10-year treasury bonds. Why? Well, the interest rate on 30-year mortgages is actually based on 10-year treasury bonds. The average mortgages is held for 10 years so fixed rate "conforming" mortgages rates are based on the 10-year treasury rate with a risk premium. That is why they track so closely to the 10-year treasury bond in figure 2.

However, it looks at least from the above graph that QEII has not had the kind of pronounced effect as QEI, at least not on mortgage rates. If anything it looks like the expectation of QEII was most of its effect. Mortgages rates went slightly lower at the end of 2010. However, the QEII effect may also be beyond an interest rate decrease. The Fed forcasting that it QEII will create 700k jobs. It is after all still increasing the money supply.

QEII is expected to end (without a commitment of more money by the Fed) in June of this year.

The Devil is in the Deflator.

At Econospeak Barkley Rosser brings up WWII:

This curiously relates to a matter that has been much argued about previously on various blogs, namely the nature of the short and sharp post-WW-I recession of 1919-20. Some have argued that this shows how wrong Keynes was, because laissez-faire was followed, including letting prices (and some wages) fall sharply in 1921, with the economy bouncing back very nicely, after having the unemployment rate soar from 5% in 1920 to 9% in 1921. Most economic historians have attributed this recession to "postwar adjustment problems."

OTOH, some of those making a big fuss about that recession somehow fail to notice that in fact there was a post-WW-II recession, if also very brief, if sharp. It occurred in 1945 with the sharpest decline in wartime spending, although not much remembered. However, the official stats have US declining in GDP by a whopping -12.7% in that year, although that number must be taken with some grains of salt due to all kinds of measurement issues and restructurings. Some say this exaggerates things as the unemployment rate only went from 1.5% to about 3.6%, a rise, but not all that much to get worked up about.

Two points. The first is that this latter event does not account for the massive decline in female labor force participation that occurred in 1945, from about 38% to about 30%. We all know (or should) that those withdrawing from the labor force do not count in the unemployment rate. That not very large increase in the UR does not disprove that there was a sharp (if short) decline in GDP.  The second point I'm not going to deal with, it is about the Federal Reserve and interest rates after the war. The point above though I'm more than happy to write about. While I do believe Prof. Rosser is mistaken, those that are challenging him in his comments section are right for the wrong reason.

Robert Higgs was mentioned about a dozen times as providing the basis for the idea that there was no post war recession. However, that claim is somewhat dubious. Higgs starts from the presumption that all government spending is useless and wasteful and with that eliminates the decline in government spending from consideration when he declares that there was no post war recession. Essentially Higgs' argument revolves around assuming that "legitimate" or "welfare enhancing" GDP = C + I + NX. What Higgs focuses on is the extraordinary jump in investment in 1946 (the end of war spending shows up in BEA data mostly in 1946, not 1945) which is actually quite remarkable and which Higgs attributes to the "pro-businesst" policies of the new Truman Administration and the general go-gettingness of the supply side.

The conclusion you reach about the depth of the recession when using NIPA data--as Higgs does--depends very heavily on which deflator you choose to use. A cottage industry has sprung up around producing WWII deflators:

Table 1 shows real GDP and real GDP growth given a bunch of different deflators:

Table 2 shows real "private" GDP and real private gdp growth

Starting from the "Hayekian" assumption that there was no business cycle downturn after the war does not disprove that there was no Keynesian effect at work. One of Prof. Higgs' most important insights is that savings was not "spent down" after the war as the traditional Keyensian story tells and that is much of his basis for declaring a supply side explanation to the post war boom . However, the demand side story holds up if one thinks of that pool of savings as the basis for the financing that allowed a returning G.I. an his new bride Rosie the Riveter to fill up there new house with the durable goods that the war spending had crowded out. Much more importantly, that pool of savings provided those new families with the financing to buy the house they bought and needed to fill with modern conveniences.

Another way of putting this that is more in line with the point Rosser is making is that Keynesian theory does not dictated an endless stream of government spending to prop up the economy. One can think of the post-war boom as a delayed multiplier effect. War production crowded out the production of durable goods (most importantly housing and cars) but increased incomes (though, yes, nominal disposable incomes did "stagnate" from 1942-1945 after a 30% increase between 1939 and 1942). These increased incomes became savings without the normal platter of goods available. That savings became goods after the war when the swelled balance sheets of financial institutions looked for new assets to replace wartime assets.

In fact, WWII as a "Keynesian Event" is unique in how dramatically it parses out the effect of government spending increases and then the secondary multiplier effect that provides the autonomous engine of growth that Keynes clearly saw as being at the heart of the capitalist system, the debate over the preface to German edition of _The General Theory_ aside.

Final Exam Schedule

Queens College finally released schedule for final exams.

Econ215 (Money and Banking):
Thursday May 19, 8:30-10:30

Econ101 (Macro):
Tuesday May 24, 8:30-10:30

Evaluation Season.

I would appreciate it if you guys would fill out the student evaluations on the QC website. The response rate is very very low. I do take them seriously but its impossible to get a good sense of whats going on with such a low response rate. It looks like you get $15 in free printing if you fill out the evaluations.

Queens College evaluations.

My page on Rate My Professor.